            C.5 Why does Big Business get a bigger slice of profits?

   As described in the [1]last section, due to the nature of the
   capitalist market, large firms soon come to dominate. Once a few large
   companies dominate a particular market, they form an oligopoly from
   which a large number of competitors have effectively been excluded,
   thus reducing competitive pressures. In this situation there is a
   tendency for prices to rise above what would be the "market" level, as
   the oligopolistic producers do not face the potential of new capital
   entering "their" market (due to the relatively high capital costs and
   other entry/movement barriers).

   The domination of a market by a few big firms results in exploitation,
   but of a different kind than that rooted in production. Capitalism is
   based on the extraction of surplus value of workers in the production
   process. When a market is marked by oligopoly, this exploitation is
   supplemented by the exploitation of consumers who are charged higher
   prices than would be the case in a more competitive market. This form
   of competition results in Big Business having an "unfair" slice of
   available profits as oligopolistic profits are "created at the expense
   of individual capitals still caught up in competition." [Paul Mattick,
   Economics, Politics, and the Age of Inflation, p. 38]

   To understand why big business gets a bigger slice of the economic pie,
   we need to look at what neo-classical economics tries to avoid, namely
   production and market power. Mainstream economics views capitalism as a
   mode of distribution (the market), not a mode of production. Rather
   than a world of free and equal exchanges, capitalism is marked by
   hierarchy, inequality and power. This reality explains what regulates
   market prices and the impact of big business. In the long term, market
   price cannot be viewed independently of production. As David Ricardo
   put it:

     "It is the cost of production which must ultimately regulate the
     price of commodities, and not, as has been often said, the
     proportion between the supply and demand: the proportion between
     supply and demand may, indeed, for a time, affect the market value
     of a commodity, until it is supplied in greater or less abundance,
     according as the demand may have increased or diminished; but this
     effect will be only of temporary duration." [The Principles of
     Political Economy and Taxation, p. 260]

   Market prices, in this (classical) analysis, are the prices that
   prevail at any given time on the market (and change due to transient
   and random variations). Natural prices are the cost of production and
   act as centres of gravitational attraction for market prices. Over
   time, market prices are tend towards natural prices but are considered
   unlikely to exactly meet them. Natural prices can only change due to
   changes in the productive process (for example, by introducing new,
   more productive, machinery and/or by decreasing the wages of the
   workforce relative to its output). Surplus value (the difference
   between market and natural prices) are the key to understanding how
   supply changes to meet demand. This produces the dynamic of market
   forces:

     "Let us suppose that all commodities are at their natural price, and
     consequently that the profits of capital in all employments are
     exactly at the same rate . . . Suppose now that a change of fashion
     should increase the demand for silks, and lessen that for woollens;
     their natural price, the quantity of labour necessary to their
     production, would continue unaltered, but the market price of silks
     would rise, and that of woollens would fall; and consequently the
     profits of the silk manufacturer would be above, whilst those of the
     woollen manufacturer would be below, the general and adjusted rate
     of profits . . . This increased demand for silks would however soon
     be supplied, by the transference of capital and labour from the
     woollen to the silk manufacture; when the market prices of silks and
     woollens would again approach their natural prices, and then the
     usual profits would be obtained by the respective manufacturers of
     those commodities. It is then the desire, which every capitalist
     has, of diverting his funds from a less to a more profitable
     employment, that prevents the market price of commodities from
     continuing for any length of time either much above, or much below
     their natural price." [Op. Cit., p. 50]

   This means that "capital moves from relatively stagnating into rapidly
   developing industries . . . The extra profit, in excess of the average
   profit, won at a given price level disappears again, however, with the
   influx of capital from profit-poor into profit-rich industries," so
   increasing supply and reducing prices, and thus profits. In other
   words, "market relations are governed by the production relations."
   [Paul Mattick, Economic Crisis and Crisis Theory, p. 49 and p. 51]

   In a developed capitalist economy it is not as simple as this -- there
   are various "average" profits depending on what Michal Kalecki termed
   the "degree of monopoly" within a market. This theory "indicates that
   profits arise from monopoly power, and hence profits accrue to firms
   with more monopoly power . . . A rise in the degree of monopoly caused
   by the growth of large firms would result in the shift of profits from
   small business to big business." [Malcolm C. Sawyer, The Economics of
   Michal Kalecki, p. 36] This means that a market with a high "degree of
   monopoly" will have a few firms in it with higher than average profit
   levels (or rate of return) compared to the smaller firms in the sector
   or to those in more competitive markets.

   The "degree of monopoly" reflects such factors as level of market
   concentration and power, market share, extent of advertising, barriers
   to entry/movement, collusion and so on. The higher these factors, the
   higher the degree of monopoly and the higher the mark-up of prices over
   costs (and so the share of profits in value added). Our approach to
   this issue is similar to Kalecki's in many ways although we stress that
   the degree of monopoly affects how profits are distributed between
   firms, not how they are created in the first place (which come, as
   argued in [2]section C.2, from the "unpaid labour of the poor" -- to
   use Kropotkin's words).

   There is substantial evidence to support such a theory. J.S Bain in
   Barriers in New Competition noted that in industries where the level of
   seller concentration was very high and where entry barriers were also
   substantial, profit rates were higher than average. Research has tended
   to confirm Bain's findings. Keith Cowling summarises this later
   evidence:

     "[A]s far as the USA is concerned. . . there are grounds for
     believing that a significant, but not very strong, relationship
     exists between profitability and concentration. . . [along with] a
     significant relationship between advertising and profitability [an
     important factor in a market's "degree of monopoly"]. . . [Moreover
     w]here the estimation is restricted to an appropriate cross-section
     [of industry] . . . both concentration and advertising appeared
     significant [for the UK]. By focusing on the impact of changes in
     concentration overtime . . . [we are] able to circumvent the major
     problems posed by the lack of appropriate estimates of price
     elasticities of demand . . . [to find] a significant and positive
     concentration effect. . . It seems reasonable to conclude on the
     basis of evidence for both the USA and UK that there is a
     significant relationship between concentration and price-cost
     margins." [Monopoly Capitalism, pp. 109-110]

   We must note that the price-cost margin variable typically used in
   these studies subtracts the wage and salary bill from the value added
   in production. This would have a tendency to reduce the margin as it
   does not take into account that most management salaries (particularly
   those at the top of the hierarchy) are more akin to profits than costs
   (and so should not be subtracted from value added). Also, as many
   markets are regionalised (particularly in the USA) nation-wide analysis
   may downplay the level of concentration existing in a given market.

   The argument is not that big business charges "high prices" in respect
   to smaller competitors but rather they charge high prices in comparison
   to their costs. This means that a corporation can sell at the standard
   market price (or even undercut the prices of small business) and still
   make higher profits than average. In other words, market power ensures
   that prices do not fall to cost. Moreover, market power ensures that
   "costs" are often inflicted on others as big business uses its economic
   clout to externalise costs onto suppliers and its workers. For example,
   this means that farmers and other small producers will agree to lower
   prices for goods when supplying large supermarkets while the employees
   have to put up with lower wages and benefits (which extend through the
   market, creating lower wages and fewer jobs for retail workers in the
   surrounding area). Possibly, lower prices can be attributed to lower
   quality products (which workers are forced to buy in order to make
   their lower wages go further).

   This means that large firms can maintain their prices and profits above
   "normal" (competitive) levels without the assistance of government
   simply due to their size and market power (and let us not forget the
   important fact that Big Business rose during the period in which
   capitalism was closest to "laissez faire" and the size and activity of
   the state was small). As much of mainstream economics is based on the
   idea of "perfect competition" (and the related concept that the free
   market is an efficient allocater of resources when it approximates this
   condition) it is clear that such a finding cuts to the heart of claims
   that capitalism is a system based upon equal opportunity, freedom and
   justice. The existence of Big Business and the impact it has on the
   rest of the economy and society at large exposes capitalist economics
   as a house built on sand.

   Another side effect of oligopoly is that the number of mergers will
   tend to increase in the run up to a slump. Just as credit is expanded
   in an attempt to hold off the crisis (see [3]section C.8), so firms
   will merge in an attempt to increase their market power and so improve
   their profit margins by increasing their mark-up over costs. As the
   rate of profit levels off and falls, mergers are an attempt to raise
   profits by increasing the degree of monopoly in the market/economy.
   However, this is a short term solution and can only postpone, but stop,
   the crisis as its roots lie in production, not the market (see
   [4]section C.7) -- there is only so much surplus value around and the
   capital stock cannot be wished away. Once the slump occurs, a period of
   cut-throat competition will start and then, slowly, the process of
   concentration will start again (as weak firms go under, successful
   firms increase their market share and capital stock and so on).

   The development of oligopolies within capitalism thus causes a
   redistribution of profits away from small capitalists to Big Business
   (i.e. small businesses are squeezed by big ones due to the latter's
   market power and size). Moreover, the existence of oligopoly can and
   does result in increased costs faced by Big Business being passed on in
   the form of price increases, which can force other companies, in
   unrelated markets, to raise their prices in order to realise sufficient
   profits. Therefore, oligopoly has a tendency to create price increases
   across the market as a whole and can thus be inflationary.

   For these (and other) reasons many small businessmen and members of the
   middle-class wind up hating Big Business (while trying to replace
   them!) and embracing ideologies which promise to wipe them out. Hence
   we see that both ideologies of the "radical" middle-class --
   Libertarianism and fascism -- attack Big Business, either as "the
   socialism of Big Business" targeted by Libertarianism or the
   "International Plutocracy" by Fascism. As Peter Sabatini notes:

     "At the turn of the century, local entrepreneurial
     (proprietorship/partnership) business [in the USA] was overshadowed
     in short order by transnational corporate capitalism. . . . The
     various strata comprising the capitalist class responded
     differentially to these transpiring events as a function of their
     respective position of benefit. Small business that remained as such
     came to greatly resent the economic advantage corporate capitalism
     secured to itself, and the sweeping changes the latter imposed on
     the presumed ground rules of bourgeois competition. Nevertheless,
     because capitalism is liberalism's raison d'etre, small business
     operators had little choice but to blame the state for their
     financial woes, otherwise they moved themselves to another
     ideological camp (anti-capitalism). Hence, the enlarged state was
     imputed as the primary cause for capitalism's 'aberration' into its
     monopoly form, and thus it became the scapegoat for small business
     complaint." [Libertarianism: Bogus Anarchy]

   However, despite the complaints of small capitalists, the tendency of
   markets to become dominated by a few big firms is an obvious
   side-effect of capitalism itself. "If the home of 'Big Business' was
   once the public utilities and manufacturing it now seems to be equally
   comfortable in any environment." [M.A. Utton, Op. Cit., p. 29] This is
   because in their drive to expand (which they must do in order to
   survive), capitalists invest in new machinery and plants in order to
   reduce production costs and so increase profits. Hence a successful
   capitalist firm will grow in size over time in order to squeeze out
   competitors and, in so doing, it naturally creates formidable natural
   barriers to competition -- excluding all but other large firms from
   undermining its market position.

C.5.1 Aren't the super-profits of Big Business due to its higher efficiency?

   Obviously the analysis of Big Business profitability presented in
   [5]section C.5 is denied by supporters of capitalism. H. Demsetz of the
   pro-"free" market "Chicago School" of economists (which echoes the
   "Austrian" school's position that whatever happens on a free market is
   for the best) argues that efficiency (not degree of monopoly) is the
   cause of the super-profits for Big Business. His argument is that if
   oligopolistic profits are due to high levels of concentration, then the
   big firms in an industry will not be able to stop smaller ones reaping
   the benefits of this in the form of higher profits. So if concentration
   leads to high profits (due, mostly, to collusion between the dominant
   firms) then smaller firms in the same industry should benefit too.

   However, his argument is flawed as it is not the case that oligopolies
   practice overt collusion. The barriers to entry/mobility are such that
   the dominant firms in a oligopolistic market do not have to compete by
   price and their market power allows a mark-up over costs which market
   forces cannot undermine. As their only possible competitors are
   similarly large firms, collusion is not required as these firms have no
   interest in reducing the mark-up they share and so they "compete" over
   market share by non-price methods such as advertising (advertising, as
   well as being a barrier to entry, reduces price competition and
   increases mark-up).

   In his study, Demsetz notes that while there is a positive correlation
   between profit rate and market concentration, smaller firms in the
   oligarchic market are not more profitable than their counterparts in
   other markets. [M.A. Utton, The Political Economy of Big Business, p.
   98] From this Demsetz concludes that oligopoly is irrelevant and that
   the efficiency of increased size is the source of excess profits. But
   this misses the point -- smaller firms in concentrated industries will
   have a similar profitability to firms of similar size in less
   concentrated markets, not higher profitability. The existence of super
   profits across all the firms in a given industry would attract firms to
   that market, so reducing profits. However, because profitability is
   associated with the large firms in the market the barriers of
   entry/movement associated with Big Business stops this process
   happening. If small firms were as profitable, then entry would be
   easier and so the "degree of monopoly" would be low and we would see an
   influx of smaller firms.

   While it is true that bigger firms may gain advantages associated with
   economies of scale the question surely is, what stops the smaller firms
   investing and increasing the size of their companies in order to reap
   economies of scale within and between workplaces? What is stopping
   market forces eroding super-profits by capital moving into the industry
   and increasing the number of firms, and so increasing supply? If
   barriers exist to stop this process occurring, then concentration,
   market power and other barriers to entry/movement (not efficiency) is
   the issue. Competition is a process, not a state, and this indicates
   that "efficiency" is not the source of oligopolistic profits (indeed,
   what creates the apparent "efficiency" of big firms is likely to be the
   barriers to market forces which add to the mark-up!).

   It is important to recognise what is "small" and "big" is dependent on
   the industry in question and so size advantages obviously differ from
   industry to industry. The optimum size of plant may be large in some
   sectors but relatively small in others (some workplaces have to be of a
   certain size in order to be technically efficient in a given market).
   However, this relates to technical efficiency, rather than overall
   "efficiency" associated with a firm. This means that technological
   issues cannot, by themselves, explain the size of modern corporations.
   Technology may, at best, explain the increase in size of the factory,
   but it does not explain why the modern large firm comprises multiple
   factories. In other words, the company, the administrative unit, is
   usually much larger than the workplace, the production unit. The
   reasons for this lie in the way in which production technologies
   interacted with economic institutions and market power.

   It seems likely that large firms gather "economies of scale" due to the
   size of the firm, not plant, as well as from the level of concentration
   within an industry: "Considerable evidence indicates that economies of
   scale [at plant level] . . . do not account for the high concentration
   levels in U.S. industry" [Richard B. Du Boff, Accumulation and Power,
   p. 174] Further, "the explanation for the enormous growth in aggregate
   concentration must be found in factors other than economies of scale at
   plant level." [M.A. Utton, Op. Cit., p. 44] Co-ordination of individual
   plants by the visible hand of management seems to play a key role in
   creating and maintaining dominant positions within a market. And, of
   course, these structures are costly to create and maintain as well as
   taking time to build up. Thus the size of the firm, with the economies
   of scale beyond the workplace associated with the economic power this
   produces within the marke creates formidable barriers to
   entry/movement.

   So an important factor influencing the profitability of Big Business is
   the clout that market power provides. This comes in two main forms -
   horizontal and vertical controls:

     "Horizontal controls allow oligopolies to control necessary steps in
     an economic process from material supplies to processing,
     manufacturing, transportation and distribution. Oligopolies. . .
     [control] more of the highest quality and most accessible supplies
     than they intend to market immediately. . . competitors are left
     with lower quality or more expensive supplies. . . [It is also]
     based on exclusive possession of technologies, patents and
     franchises as well as on excess productive capacity . . .

     "Vertical controls substitute administrative command for exchange
     between steps of economic processes. The largest oligopolies procure
     materials from their own subsidiaries, process and manufacture these
     in their own refineries, mills and factories, transport their own
     goods and then market these through their own distribution and sales
     network."
     [Allan Engler, Apostles of Greed, p. 51]

   Moreover, large firms reduce their costs due to their privileged access
   to credit and resources. Both credit and advertising show economies of
   scale, meaning that as the size of loans and advertising increase,
   costs go down. In the case of finance, interest rates are usually
   cheaper for big firms than small ones and while "firms of all sizes
   find most [about 70% between 1970 and 1984] of their investments
   without having to resort to [financial] markets or banks" size does
   have an impact on the "importance of banks as a source of finance":
   "Firms with assets under $100 million relied on banks for around 70% of
   their long-term debt. . . those with assets from $250 million to $1
   billion, 41%; and those with over $1 billion in assets, 15%." [Doug
   Henwood, Wall Street, p. 75] Also dominant firms can get better deals
   with independent suppliers and distributors due to their market clout
   and their large demand for goods/inputs, also reducing their costs.

   This means that oligopolies are more "efficient" (i.e. have higher
   profits) than smaller firms due to the benefits associated with their
   market power rather than vice versa. Concentration (and firm size)
   leads to "economies of scale" which smaller firms in the same market
   cannot gain access to. Hence the claim that any positive association
   between concentration and profit rates is simply recording the fact
   that the largest firms tend to be most efficient, and hence more
   profitable, is wrong. In addition, "Demsetz's findings have been
   questioned by non-Chicago [school] critics" due to the
   inappropriateness of the evidence used as well as some of his analysis
   techniques. Overall, "the empirical work gives limited support" to this
   "free-market" explanation of oligopolistic profits and instead suggest
   market power plays the key role. [William L. Baldwin, Market Power,
   Competition and Anti-Trust Policy, p. 310, p. 315]

   Unsurprisingly we find that the "bigger the corporation in size of
   assets or the larger its market share, the higher its rate of profit:
   these findings confirm the advantages of market power. . . Furthermore,
   'large firms in concentrated industries earn systematically higher
   profits than do all other firms, about 30 percent more. . . on
   average,' and there is less variation in profit rates too." Thus,
   concentration, not efficiency, is the key to profitability, with those
   factors what create "efficiency" themselves being very effective
   barriers to entry which helps maintain the "degree of monopoly" (and so
   mark-up and profits for the dominant firms) in a market. Oligopolies
   have varying degrees of administrative efficiency and market power, all
   of which consolidate its position. Thus the "barriers to entry posed by
   decreasing unit costs of production and distribution and by national
   organisations of managers, buyers, salesmen, and service personnel made
   oligopoly advantages cumulative -- and were as global in their
   implications as they were national." [Richard B. Du Boff, Accumulation
   and Power, p. 175 and p. 150]

   This explains why capitalists always seek to acquire monopoly power, to
   destroy the assumptions of neo-classical economics, so they can
   influence the price, quantity and quality of the product. It also
   ensures that in the real world there are, unlike the models of
   mainstream economics, entrenched economic forces and why there is
   little equal opportunity. Why, in other words, the market in most
   sectors is an oligopoly.

   This recent research confirms Kropotkin's analysis of capitalism found
   in his classic work Fields, Factories and Workshops. Kropotkin, after
   extensive investigation of the actual situation within the economy,
   argued that "it is not the superiority of the technical organisation of
   the trade in a factory, nor the economies realised on the prime-mover,
   which militate against the small industry . . . but the more
   advantageous conditions for selling the produce and for buying the raw
   produce which are at the disposal of big concerns." Since the
   "manufacture being a strictly private enterprise, its owners find it
   advantageous to have all the branches of a given industry under their
   own management: they thus cumulate the profits of the successful
   transformations of the raw material. . . [and soon] the owner finds his
   advantage in being able to hold the command of the market. But from a
   technical point of view the advantages of such an accumulation are
   trifling and often doubtful." He sums up by stating that "[t]his is why
   the 'concentration' so much spoken of is often nothing but an
   amalgamation of capitalists for the purpose of dominating the market,
   not for cheapening the technical process." [Fields, Factories and
   Workshops Tomorrow, p. 147, p. 153 and p. 154]

   It should be stressed that Kropotkin, like other anarchists, recognised
   that technical efficiencies differed from industry to industry and so
   the optimum size of plant may be large in some sectors but relatively
   small in others. As such, he did not fetishise "smallness" as some
   Marxists assert (see [6]section H.2.3). Rather, Kropotkin was keenly
   aware that capitalism operated on principles which submerged technical
   efficiency by the price mechanism which, in turn, was submerged by
   economic power. While not denying that "economies of scale" existed,
   Kropotkin recognised that what counts as "efficient" under capitalism
   is specific to that system. Thus whatever increases profits is
   "efficient" under capitalism, whether it is using market power to drive
   down costs (credit, raw materials or labour) or internalising profits
   by building suppliers. Under capitalism profit is used as a
   (misleading) alternative for efficiency (influenced, as it is, by
   market power) and this distorts the size of firms/workplaces. In a sane
   society, one based on economic freedom, workplaces would be
   re-organised to take into account technical efficiency and the needs of
   the people who used them rather than what maximises the profits and
   power of the few.

   All this means is that the "degree of monopoly" within an industry
   helps determine the distribution of profits within an economy, with
   some of the surplus value "created" by other companies being realised
   by Big Business. Hence, the oligopolies reduce the pool of profits
   available to other companies in more competitive markets by charging
   consumers higher prices than a more competitive market would. As high
   capital costs reduce mobility within and exclude most competitors from
   entering the oligopolistic market, it means that only if the
   oligopolies raise their prices too high can real competition become
   possible (i.e. profitable) again and so "it should not be concluded
   that oligopolies can set prices as high as they like. If prices are set
   too high, dominant firms from other industries would be tempted to move
   in and gain a share of the exceptional returns. Small producers --
   using more expensive materials or out-dated technologies -- would be
   able to increase their share of the market and make the competitive
   rate of profit or better." [Allan Engler, Op. Cit., p. 53]

   Big Business, therefore, receives a larger share of the available
   surplus value in the economy, due to its size advantage and market
   power, not due to "higher efficiency".

References

   1. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC4.html
   2. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC2.html
   3. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC8.html
   4. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC7.html
   5. file://localhost/home/mauro/baku/debianize/maint/anarchy/secC5.html
   6. file://localhost/home/mauro/baku/debianize/maint/anarchy/secH2.html#sech23
